New duty proposed for financial firms to give stronger consumer protections

Financial firms will have to put themselves in customers’ shoes and make sure they are acting in their best interests under proposals from the City regulator.

The Financial Conduct Authority (FCA) has outlined plans for a new consumer duty, setting higher expectations for firms’ standards of care towards consumers.

It said: “We want firms to actively put consumers at the heart of their business”.

For many firms, this will require a significant shift in culture and behaviour, according to the regulator.

The duty would apply to a wide range of financial sectors, including banking, credit, mortgages, investments, pensions, insurance and payment services.

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It would help consumers to consistently receive products and services that are fit for purpose, fair value and clearly understandable.

The proposals could help tackle the “loyalty penalty” people sometimes pay when rolling over their insurance, for example, or help people make sure they choose a suitable current account deal.

The FCA has also previously found issues with products having features that take advantage of people’s behavioural biases, for example, a tendency among some consumers to over-borrow and under-pay in the credit card market.

The wording for a “consumer principle” being consulted on as part of the plans is: “A firm must act in the best interests of retail clients” or: “A firm must act to deliver good outcomes for retail clients.”

In their behaviour, firms will be expected to take all reasonable steps to avoid foreseeable harm to customers, enable customers to pursue their financial objectives and act in good faith.

The new requirements will have an impact on firms’ communications and customer services.

Businesses will also have to show the benefits of their products and services are reasonable relative to their price.

Firms would have to follow the new duty or face regulatory action, including enforcement investigations.

The regulator said some products and services appear to be designed, whether intentionally or not, without considering customer outcomes.

Some financial products may also have charging structures which are difficult to understand or deter customers from switching.

One in four people in the FCA’s 2020 financial lives survey said they lack confidence in the financial services industry and only just over a third (35%) agreed that firms are honest and transparent in their dealings with them.

Sheldon Mills, executive director of consumers and competition at the FCA, said: “We want firms to be putting themselves in the shoes of consumers and asking: ‘Would I be happy to be treated in the way I treat my customers?’.”

Mr Mills later told the PA news agency that the new duties would have a focus on “fair value, so that firms are ensuring that their products and services represent fair value for customers”.

While it is up to firms to set their prices, “those prices and the whole product should represent fair value”, he said.

He added: “Technology has changed the way that we interact with financial services’ products and services.

“So we can now open a savings account through our online banking, we can get a loan through online sites, we can contract for insurance online.

“We can set up an account to trade investment products and services online – all within minutes.

“And what that means is the choice that you make to contract financial products and services can be quite quick.

“So that means that you’ve got to get the terms, the conditions, the price, all readily attainable and clear for the customer to fit on their smartphone.

“But you’ve still got to protect that customer, offer fair value to them and make sure that they can understand what they’re signing up to.

“Because financial services are at the heart of people’s lives – and we want them to enable people to lead healthy financial lives.”

He said many firms are providing great innovation “but these are new challenges and we want the industry to meet them head-on”.

The consultation is open for comment until July 31 2021.

The FCA expects to consult again on proposed rule changes by the end of 2021 and make any new rules by the end of July 2022.

The regulator is also considering the potential benefits of attaching a private right of action to the new duty, which would enable people to take firms to court, and what any unintended consequences of this might be.

Mr Mills told PA: “We are consulting on what the benefits and advantages would be of a private right of action and we will look at that carefully and decide whether or not that is something which we would consider is appropriate to recommend.”

Caroline Siarkiewicz, chief executive officer of the Money and Pensions Service said: “Financial services providers have a critical role to play in ensuring that their customers can truly make the most of their money and pensions.”

Peter Tutton, head of policy, research and public affairs at StepChange Debt Charity said: “We strongly welcome the FCA’s commitment to develop and take forward a strong consumer duty and will look at the detail of its proposals carefully.

“An effective duty has the potential to proactively drive real change and better protect vulnerable consumers.”